Property

Taiwan's levelling off

Taiwan—Taipei in particular—has been dominated by some of the same property cycles as Hong Kong: skyrocketing prices, falling affordability, an influx of hot investor money, and an alluring low interest rate environment. However, Standard & Poor’s sees the market finally stabilising in 2018, with domestic residential buyers making a return. Taiwan’s status as a wise investment choice remains tricky, and reliant on what happens in the commercial sectors, what with its small tenant pool and low yields (unlike Hong Kong, which simply has low yields). For those considering a Taiwanese investment, it would be wise to investigate the bigger picture and the bigger players.

Setting the Tone

Not surprisingly, the pacesetting commercial sector is key to the market, and in Taiwan the key commercial market remains as Taipei. “Office properties are sought after by institutional investors. However, office investment activity was sluggish in 2017 mainly due to the lack of investable office assets and the low yield level,” cautions Ping Lee, associate director of research at CBRE Taiwan. “Prime office yield in Taipei was 2.5% in Q4 2017. There may be an increase in investor interest in retail properties as selected investors are seeking value-added investments.”

Taiwan is not dominated by giant state-owned enterprises, chae-bols or keiretsu, and small- and medium-sized domestic businesses are a core asset to the country’s economy. An expanding global economy and domestic demand should help Taiwan’s GDP this year, which JLL stated grew by 2.11% in 2017. Late-year telecommunication product launches buoyed the overall economy, though tourist arrivals slumped, hurting hospitality industry salaries. Similar to Hong Kong, co-working spaces are starting to make their presence felt in the office sector. Local players are also expected to be the major drivers for 2018. “In terms of commercial property investment, the persistently low interest rates will likely prompt local enterprises to purchase commercial properties for self-use,” theorises Lee.

Among Taiwan’s biggest challenges for the year are overcoming soft investor interest as a result of those low yields and the limited availability of suitable stock. Nonetheless, “Overall, Taiwan’s commercial real estate market is expected to strengthen in 2018 on the back of improving economic fundamentals, coupled with stable leasing demand,” notes Lee. Colliers International agrees, estimating that of the 3.4 million square feet of new supply coming to the Hsin Yi district by 2020, approximately 40% will be owner-occupied, though with vacancy rates sitting at roughly 10%, landlords with premium office stock for rent will be in fierce competition for tenants.

Residential investment could be quite another story, however. Following fears of out-of-control speculation in 2008, a luxury tax was introduced in July 2011, with unoccupied second homes sold within one year of purchase taxed at 15% and 10% within two years. More measures followed in 2014 in the form of property taxes on non-owner-occupied residential properties climbing to 3.6% under some circumstances, and then a revised capital gains tax again in 2016 that imposed a potential 45% duty on second homes sold within six years of purchase.

Transaction volumes are up after three straight years of decline, by 9%, but that’s still below long-term averages based largely on speculation, according to CBRE in Taiwan. That said, “Affordability remains an issue as the house price to income ratio was 15.1 in Taipei in 2017,” notes Lee. That’s a crucial metric in Taiwan, more so than in Hong Kong, and that 15.1 number is well above the national average of 9.2. To put that into perspective, according to research group Demographia, New York’s price to income ratio in 2016 was 5.7, London’s was 8.5, Sydney clocked in at 12.2, and Hong Kong practically ruled at 18.1. Taipei’s ratio was also up from 7.4 in 2004. A healthy ratio is considered between 4 and 6. That number means Taiwanese families were putting an average of 66% of household incomes to mortgage payments. Affordable is considered 30%. “Many sellers are under little pressure to lower their asking prices given the low interest rate level. Therefore, price correction in the housing market has been mild,” adds Lee.

Even under those circumstances, as of the fourth quarter of 2017, residential prices in Taipei are sitting ever so slightly down from the previous year, by just 1.2% year-on-year and 14% from 2014 peaks. Third quarter prices in other key cities were showing positive growth: Taoyuan gained 2.7%, Hsinchu 2.8%, Taichung 2% and Kaohsiung 4.3%. Prices dropped in Xinbei (New Taipei) but only by 0.9% after more significant declines in 2015 and 2016. “The residential sector… may continue to see low transaction volumes in 2018 until a more significant price correction occurs,” Lee maintains. Institutional residential investment is rare in Taiwan, and foreign investors are subject to higher capitals gains taxes. In addition, Taiwan is a minor rental market, and “Foreign individuals and corporations are allowed to buy real estate in Taiwan based on the Reciprocal Principle. Foreign investors can enjoy rights in Taiwan only if Taiwanese investors can enjoy the same rights in the home country of the foreign individual or the country where the foreign company is headquartered,” explains Lee.

So, if the Taiwanese can buy land in Australia, Australians can buy land in Taiwan. If only flats are allowed, then the same applies. Taiwan will continue to appeal to Hongkongers for its lack of restrictions, close geographic proximity and, ironically, comparative affordability: in March 2018 a CBD flat in Taipei averaged roughly HK$7,000 per square foot.